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2. AEM 4550: Economics of Advertising Prof. Jura Liaukonyte LECTURE 11: Brand Equity

3. Lecture Plan  Guest Lecture  HW 4  Exams  Brand Equity  Measuring Brand Equity  Example  How to calculate Brand Value

4. Guest Lecture – Thursday, March 12  2:55PM in WN B50 (No class at 1:25PM)  Seth Sarelson, COO Revtrax  2004 Dyson graduate; Co-founder of Revtrax  Bridging the gap between digital media and in- store sales  Analytics, direct response marketing, coupons, affiliate marketing, loyalty & rewards programs.

5. Brand Equity  Brand Equity is a set of brand assets and liabilities linked to a brand, its name and symbol, that add to the value provided by a product or service to a firm and/or to that firm’s customers.  Assets and liabilities underlying brand equity must be linked to the name and/or symbol of the brand. Definition

6. Brand Equity: Why it matters  Greater loyalty  Less vulnerability to competitive marketing actions  Less vulnerability to marketing crises  More inelastic consumer response to price increases  Possible licensing opportunities  Additional brand extension opportunities  Larger margins: on average, prices of strongest brands are 19% higher than weakest brands in category Outcomes Research   Identify the effectiveness of individual brand assets   Identify the barriers to achieving a brand’s full potential   Identify consumer relationships with the brand   Identify the status of the brand in a competitive context Benefits   Simplifies choice process   Enhances confidence in choice   Reduces perceived risk – recognition of consistency of quality   Provides emotional benefits – signal of status, taste, or affiliation

7. BrandZ Top 100 Brands 2011 2014

8. Interbrand 2011

9. Interbrand 2014

10. One approach to Brand valuation calculation  A systematic approach to brand valuation was jointly developed by Interbrand and the London Business School in 1988. The method was partially revised in 1993.  Since then, Interbrand has evaluated some 3500 brands for nearly 400 companies.

11. One approach to Brand valuation calculation  The purpose of evaluations of brand equity: 1. Evaluations for financial transactions in connection with mergers & acquisitions, internal licensing and fiscal issues. 2. Evaluations to optimize brand investments, advertising expenditures, monitor an manage future changes in brand value.

12. Brand Equity/Value  Brand value is defined as the NPV of future earnings generated by the brand alone. One approach (Interbrand) is based on the following three economic functions: 1. create cost synergies, 2. generate demand for the products and services, and 3. secure future demand and thus reduce operative and financial risks.

13. Calculating Brand Equity  The method employed to evaluate brands comprises five steps: 1. Segmentation, 2. Financial analysis, 3. Demand analysis, 4. Brand strength analysis, 5. Calculation of the net present value of brand earnings.

15. Segmentation  Consumers’ purchasing behavior and attitudes towards brands differ from one market sector to another.  The value of a brand can only be determined precisely through the separate assessment of individual segments that represent a certain customer group.

16. Financial Analysis  Start with an assessment of the company's value and then determine the value contributed by the brand.  Isolate brand earnings from other forms of income is to determine the Economic Value Added (EVA)  which tells whether a company is able to generate returns that exceed the costs of capital employed.  The analysis is based on a five-year forecast of future revenues.

17. Demand Analysis  Analyze the brand’s value chain and identify the position of the brand in the minds of customers.  To determine the brand’s share of EVA:  Evaluate the factors that influence demand and motivate customers to purchase.  These factors are weighted in terms of their bearing on demand  The sum of these brand contributions on the demand drivers is expressed as the Role of Brand Index (RBI)  RBI multiplied with the EVA, yields the brand earnings.

18. Demand Analysis

19. Brand Strength Analysis  The stronger a brand, the lower is its risk, and thus the more certain are future brand earnings.  Assess the competitive position and infer the risk by analyzing the strength of a brand compared with its competitors on the basis of seven factors  market,  stability,  brand leadership,  trend,  brand support,  diversification,  protection  This step results in the Brand Strength Score (BSS).

20. Brand Strength Score

21. Net Present Value Calculation  The economic value of future brand earnings is inversely correlated with the brand’s estimated risk  This risk is directly linked to brand strength.  The procedure reflects the dynamism of the market: extreme ends of the scale brands react differently from brands in the middle range.

22. Net Present Value Calculation  Strongest brands are discounted with the risk-free rate of the total market while average-strength brands are discounted with the industry WACC (cost of equity in the financial service industry).  Discounting the forecast period (present value) and the calculation of an annuity (terminal value) results in the total value of the brand.  The transformation of brand strength into brand risk (or into discount rate) is completed using an S-curve.

23. Net Present Value Calculation

24. Total Brand Equity  Since this procedure focuses on value creation, it is independent of potential and probable changes in organizational structure.  The total value of the brand is calculated as the sum of its segment values (sum-of-the-parts).

25. Example: Dell

26. Example  Let’s Calculate Brand equity of DELL INC.  This will be just a rough approximation since we will be making some assumptions along the way

27. Example  Similar to the one in HW4  Critical assumptions:  Assume that we are T-5 years from the latest available financial statement. E.g. If the latest financial statement is in 2009 assume we are in year 2004.  Normal analysis requires forecasting 5 years in advance.  We will assume that the actual financial performance for the years 2005, 2006, 2007, 2008, and 2009 (obtained from financial statements) is the forecast as of 2004.

28. Example  Assume that Brand Strength analysis revealed that the appropriate discount rate is 9%  Just above WACC = 10%  Role of Brand Index (RBI) = 40%  Get the financial data from:  Go to Mann library website  Click on Find->Databases  Social Sciences->Business and Management  Mergent ONLINE  Click on “COMPANY FINANCIALS”

29. Mergent Online STEPS:  Click on “COMPANY FINANCIALS”  ANNUALS + BALANCE SHEET will be default  From here you need to take TOTAL CURRENT ASSETS (in this case it is line 12) of data for 5 years.  Can be different line for other companies.  Next, switch to ANNUALS + INCOME STATEMENT  From here you need to take NET INCOME (LOSS) (in this case it is line 11 from the bottom) of data for 5 years  These 2 sets of numbers should be enough to calculate brand equity. (choose only if net income>0)

30. DELL